Is ESG Effective?

You probably want to understand what you are investing in.

It’s been a long time since I wished there was an app to tell me how many polar-bears I would save with the money invested in ESG. ESG impact and statistics do not include polar bears.

It is difficult to measure the good that ESG produces. The concept of “good” may not be one that we can all agree upon. ESG also uses difficult-to-understand numerical scores to indicate how well a business is performing.

As an example, a major energy-drink manufacturer scored 0 on the ESG scale. Andrew Behar is the CEO of As You Sow. The nonprofit works to improve corporate social and environmental responsibility.

The return on investment was greater than the costs of new practices. The focus was on increasing the ESG score of the company (from 0 to 26, out of 100). However, the change resulted in a reduction of forced labor.

What number would you use to quantify a positive impact? Even though there are several ways to measure positive impact, they can still be deceptive. These misleading or even false claims are known as greenwashing.

Impact portfolios are now offered by many automated financial advisors (robo-advisers). These portfolios consist of ETFs that are grouped according to certain themes. For example, investing in renewable energy. Some claim to donate money to charity. There are several funds that have not donated one dollar.

ESG can help combat “greenwashing” by providing quantifiable data. The term ESG is not regulated and can lead to confusion.

Behar says, “We produced a report in which we noted that 90 mutual funds had ESG as part of their names. 60 received a C or F for ESG. We then analyzed their prospectuses. Bottom line: The prospectus is not correlated with the fund name .”, nor is it correlated with the funds’ holdings.

You may spend a lot of time trying to find out the ESG’s overall positive output. These numbers do not exist yet (at the very least). There are some examples of companies that have made gradual changes over the years.

It is unquestionably good when a single company reduces the amount of slave labor in their supply chain as a result of ESG and shareholders advocacy. And that’s just one example.

ESG guidelines and their users have resulted in a large reduction of pesticides, an increase in sustainability programs, and a greater diversity among company employees.

These companies saw their profits increase as a result of the ESG changes that they implemented. ESG is a real, quantifiable good.

While you might not have a way to measure the dollar value of ESG, it doesn’t necessarily mean investing isn’t worthwhile. ESG innovations help investors to make smarter choices.

According to Alexandra Mihailescu Cichon of RepRisk (an ESG data-science company), some exchange-traded fund now include a feature which automatically excludes companies that do not meet the ESG standards.

What can well-intentioned investor do in the face of what may seem like a high-targeted marketing campaign and trickery? Do not lose faith.

Cichon: “I believe we are in a phase where we have a little transition from the commitments to pledges era.” Now we are in the execution phase of our commitments. Then, part of the execution is to measure that impact, and see if it has an actual effect on change .”

Investors have been demanding more of the companies in which they invest. The landscape of ESG investing has changed drastically despite the politics and greenwashing. Over the past few years, massive amounts of capital have been invested in sustainable investments.

The message is clear: Investors are tired of business practices which do more harm than they benefit. The outrage over the lack of transparency around these practices confirms the fact that investors are going to continue holding businesses accountable, until real changes start happening. Maybe even some polar-bears.